I.                   INTRODUCTION  

The system of lending is an age-old tradition where goods and services were lent out on returnable basis with the interest charged in kind. The modern day concept of lending involves the use of money.  

Money has been in circulation long ago but people were never governed wholly by the purchasing power of money since they had the options of bartering or trading in kind. The modern and planned development in Bhutan was introduced in 1961 through the First Five Year Development Plan. In the 1960's development was primarily focused on the establishment of road and social service infrastructure consisting of schools and hospitals. In the 1970's the scope of the Five Year Plans were broadened to include some economic services. The end of the 1970's had diversified the sources of development assistance substantially and earlier investment made in human resources started paying dividends whereby both the management and formulation of development plans became more indigenously driven. At the same time some institutional development measures such as decentralization of local government started laying emphasis on the development of agricultural and rural sectors towards achieving balanced economic development throughout the country.  

In Bhutan the system of credit is very young  phenomenon and it did not gain much impetus until recently with the emergence of a strong monetary system. In the remoter areas of the Kingdom, rural credit is still not a feature for the people prefer to continue with their old system of trading in kind.  

With the introduction of privatization and the ever-increasing market economy, rural credit is gaining a foothold in the country. Money is now the governing factor since the purchasing power of money can guarantee the delivery of services and products. The access to credit for productive activities has increasingly been realized as the most important means of combating poverty in rural areas. Along with the ownership of assets and education, credit has been instrumental in raising income of the rural disadvantaged households.  

Going by the experiences gained in other Asian developing countries, it is seen that the formal rural lending institutions are meeting only a small percentage of the demand of rural poor. The commercial banks and specialized agricultural and rural development banks are, to a large extent, meeting the needs of large borrowers and have not been able to reach out adequately the disadvantaged rural households. The small farmers' development programmes in Nepal and Grameen bank in Bangladesh are able to cover no more than 5-6 percent of their needs. The most successful rural credit programme initiated by the Grameen Bank, has covered less than 20% of rural landless families upto 1994 assuming that all borrowers were poor. If this is the pace of growth in coverage it would be futile to expect access of credit to disadvantaged rural households through formal lending agencies alone.  

It is therefore important to bring more innovative approach into the rural lending operations in a big way for which new policies would be necessary to reduce poverty in rural areas.  

II.                History of BDFC (How Micro-Finance started in Bhutan)

Microfinance (Rural Credit) in Bhutan featured only in 1980. The Bank of Bhutan (BOB), which is mandated to give 20% of their loan portfolio as rural credit did not lend even 1% of their loan portfolio. The reason was that BoB's loans are high secured. The farmers who needed were not able to meet the collateral and personal guarantor requirement. Acknowledging the situation, the Royal Government of Bhutan decided that there had to be a separate institution to deal with rural lending and Food Corporation of Bhutan (FCB) was identified as the appropriate organization in 1980. The Corporation upon assuming the responsibility was faced with financial difficulties and had to resort to borrowing from RICB and BoB at commercial interest rate of 14% per annum.  

The FCB operation was short lived due to manpower and logistic problems in addition to having to borrow at high rate of interest and re-lend at lower rate. The Rural Credit Scheme under the FCB lasted only two years.  

The RGoB despite establishing the Bank of Bhutan and the RICB for the purpose of general credit to business communities realized that lending was biased towards general trade, transport and real estate development. It was observed that these financial institutions insisted for high collateral requirements for its lending, which had made it impossible for rural farmers to avail any form of credit.  

It was at this time that the need to establish a Development Bank, which would provide the much required credit facilities for accelerating rapid industrialization and rural development process initiated during the 5^th FYP (1981-1987), was felt most. The desired Development Bank was expected to provide loans for industrial and agriculture related activities including the rural credit program activities in the country.  

Consequently, in addition to the existing section for rural credit programme, which was operational since 1982, another section to deal with industrial credit programme was set up under the Royal Monetary Authority (RMA) during early part of the mid-eighties to ultimately create a new institution equivalent to a Development Finance Institute (DFI) like elsewhere in other South East Asian countries.  

Thereafter, the Asian Development Bank (ADB) had provided some technical assistance for further strengthening and institution building of the DFI, which was later separated from the RMA and established as an autonomous organization called the Bhutan Development Finance Corporation with signing of the Royal Charter (RC) on January 31, 1988. The RC was later renamed as Articles of Incorporation (AOI) of BDFC. The Corporation was, however, actually established only on March 13, 1988 when all the assets and liabilities of the Rural Credit Program and Industrial Program Sections were formally transferred to BDFC. The Corporation was later registered with the Company's Act of Bhutan which was enacted in 1989.

III.             Background about BDFC's Operation  

The Bhutan Development Finance Corporation (BDFC) is the newest and smallest of Bhutan's financial institutions, and the only one with a rural focus. It was created in response to the requirement of a development finance institution to provide finance for fostering private enterprise involvement in the nation's industrial and agro-based sectors.  

On its creation the BDFC immediately assumed responsibility for the nation-wide Rural Credit Programme, which mainly provide seasonal, small and medium term loans to the country's small farmers. It had also commenced its Industrial Lending operations providing term finance and working capital for industrial and agro-based ventures. This is also the only institution that supports rural lending through its branch offices in all the 20 Districts in the country.  

The BDFC over the years has not only gained substantial experiences but has also tremendously improved the credit delivery system of the programme.  

The operations of BDFC are fully computerized and on an average each District has three credit staff members. The total staff strength of the BDFC including the Head Office is 124 employees as of year-end 2001 (28 in Industrial Lending Department and 96 in Agriculture Lending Department). The Agriculture Lending Department is mainly involved with agriculture and rural lending activities. The Head Office of BDFC is located in Thimphu and has a Liaison Office in Phuntsholing.  

As of December 31, 2001, the BDFCs total outstanding loan balance was Nu.611.53 million, of which Nu. 404 million were for industrial and Nu. 208 million were Agricultural Lending1.  

The cumulative disbursements for rural lending by district-wise right from the inception of the programme in 1982 till year end 2001 for all funds put together amounted to Nu. 531 million. This depicts the exposure and coverage of BDFC's rural financial assistance on a nation-wide scale. The BDFC's agriculture and rural lending portfolio commenced with a total disbursement of Nu. 1.6 million in 1982.  

The status of BDFC's agriculture and rural credit loans on-time recovery performance increased from about 40% in 1988 to 77.33% as of December 31, 2001. The total portfolio of ALD as of December 31, 2001 is Nu. 208 million. The recovery performance depicts a satisfactory performance benefiting 40,043 (cumulative) rural farmers nation-wide. The number of active clients as of December 31, 2001 is 11,061. The estimated number of rural household in Bhutan is about 65,000 as per the Credit Demand Assessment Report of Kyingkhor Consultancy 2000.  

The audited Balance Sheet of the BDFC as of December 31, 2001 showed that the company's total assets/liabilities was Nu. 809.28 million. During the same period the Corporation made a profit of Nu. 24.4 million (Industrial- Nu.18.50 million and Agriculture Lending Department-Nu.5.9 million). The overall reserves and surplus for the year was Nu. 105.29 million (Industrial -Nu. 82.85 million and Agriculture Lending Department -Nu. 22.44 million).  

The paper would mainly discuss on ALD (Agriculture Lending Department) of BDFC engaged in Microfinance activities.  

Rural Finance and Role of BDFC-ALD  

The purpose of the Corporation was to primarily promote the industrial, agricultural and commercial development of the economy of Bhutan by:  

           (a)  providing financial, technical and advisory assistance to enterprises;

           (b)  mobilizing external and internal capital for investment in enterprises;

           (c)  Engaging primarily in the promotion of industrial, agricultural and commercial enterprises in Bhutan. 

As over 85% of the population are dependent on agriculture for their livelihood, the role of BDFC in providing financial services in the rural areas cannot be ignored.  

The focus of the formal financial sector of Bhutan is oriented towards the more modern and urban sectors of the economy. These characteristics reflect the country's rather low level of development and monetization, and difficulty of expanding financial services into remote rural areas.  

Intervention by financial intermediaries in the rural sector is strongly impacted by the uniquely harsh physical conditions in which the rural population operates, the relatively small and scattered rural population, and the lack of monetization in many areas, these together resulting in small, difficult to service financial market for which there are no economies of scale. It is due to these factors that essential financial services are not available to the rural community where the need for such services can be said to be the highest, and apart from the BDFC's Rural Credit Programme there is reluctance by financial institutions to undertake rural operations which are un-economic or do not conform to banking conditions.  

Sources of Fund  

The resources of BDFC-ALD consist of paid up Share Capital, Grants received from donors, Rural Credit Bond, Reserves and Surpluses, and an operational subsidy provided by the Government.  

The details of BDFC-ALD's resource base as of year 2001 are as follows:

The RGOB had been providing a subsidy of Nu. 5.00 million annually upto 1992. However, from 1993 this subsidy level has been voluntarily reduced in the declining order of Nu. 3.00 million in 1993, Nu. 2.00 million in 1994 and Nu. 1.00 million in 1995 as a measure to make BDFC a self sustaining institution.  

Lending Policies  

The ALD Lending are targeted either for rural development or for agricultural sector development. Recently, BDFC have diversified its activities to non-farm sectors to further address the need of the farmers.  

Under the Agriculture Lending Department funds are made available through provision of seasonal, and term loans for agricultural inputs (like seeds, plants, fertilizers, tools and implements, chemicals), land development, livestock development, orchard development and other farm and non-farm activities.  

BDFC, as a Development Financial Institution is expected to strongly support the government with the provision of the vital services in the form of credit and other expertise especially in the declared objectives of Self reliance, Improving the Quality of Life and in the Privatization and Private Sector Development.  

The Corporation conducts its operations within the general framework of the national economic policies, plans and priorities of the Royal government of Bhutan. The Corporation provides financial assistance only to those projects which on the basis of its own analysis, appear to be economically justified, technically feasible, and financially viable and profitable. Special attention is given to the quality of management of the enterprise and the market prospects of the project.  

III.             Modality of Operation  

The BDFC is the main player in the formal financial sector for provision of rural credit facilities in Bhutan, both in terms of fund allocation and coverage. The reluctance on the part of other financial institutions to finance rural based activities has contributed to BDFC's taking a lead role in the sector.  

Inspire of the limited investment opportunities, other financial institutions are reluctant to participate in financing rural activities mainly due to high risks of lending, small sizes of loans to be disbursed, high administration cost of operation, wide coverage of lending areas, and the peculiar operational conditions which do not conform to the normal banking standards.  

The Rural Credit Programme of the BDFC has been designed to have far reaching effects since majority of the country's population is rural based, and the ultimate objective is to increase income and improve the welfare of this section of society. However, an institution like BDFC need to self-sustain its operation to be in the market place in the long run and should therefore focus its activities mainly on income generating activities.  

It, therefore, provides timely and readily accessible credit on appropriate terms and conditions to the farming community in order to finance essential agricultural, animal husbandry and other income generating activities/inputs. It should be efficient, generate confidence, and have the capacity to increase its coverage in terms of both client numbers and increased demands for investment over time.  

In the past the Management had been providing technical backstopping directly from Head Office, Thimphu to all the twenty District Branch Offices. Further decentralization of the credit delivery mechanism from district centres down to the Geog centers call for a greater degree of supervision, monitoring, control and prompt decisions from an office of adequate authority and resources located close to the field operations. Accordingly, three Regional Offices (RO) each for the Eastern, Central and Western Region was being set up in 1998 to provide effective backstopping and supporting the micro-credit operations of the branch offices. The establishment of RO's greatly facilitated in addressing the needs and problems of credit activities within their region. The services were offered much faster and have brought credit much closer to the clients.  

The Regional Offices (ROs) are manned by a Regional Manager, a Computer Programmer and an Entrepreneurship Development Officer. The Regional Offices also facilitate and act as the training centers for the training of credit staff in their region.  

The Microfinance terminology instead of rural credit was also being introduced in 1998 with the launching of the project "Strengthening Capacities for Sustainable Microfinance" signed between RGoB, UNCDF, SNV and BDFC as the implementing agency.  

In 1998, the Microfinance services have also been decentralized to 20 Dzongkhags through the establishment of Branch Loan Committees (BLC). The services have further been decentralized down to the Geog centers through establishment of Geog Loan Committee (GLC) and BDFC have also recently launched mobile banking activities at the grass root level to cater to the growing need of the rural farmers.  

Approach of BLC (Branch Loan Committee)  

The authority for implementation of the Microfinance Programme at the District level is delegated to the BLC (Branch Loan Committee) composed of the following members:  

At the District level, the District Credit Officer is responsible for managing and operating the credit activities of BDFC and also acts as the Chairman of BLC. The BLC has been delegated authority to sanction loan upto a tune of Nu.30,000 per client at a time. The BLC also has the responsibilities of ensuring that the recoveries are received for loan that it disburses. Requests exceeding this limit are to be referred to the BDFC Head Office for its consideration and approval.  

The BLC meetings are held as frequently as required depending on the number of applicants and seasonality of such loan requests, but at least four such meetings should take place in a year. The required quorum of the BLC meeting is just simple majority.  

Approach of GLC (Geog Loan Committee)  

With the introduction of the GLC credit awareness amongst the rural farming communities has been enhanced to a great extent. Further, the loan disbursement and repayment procedures have been simplified with greater effectiveness. The GLC also plays a vital role in instilling credit discipline in the farmer clients, which in turn helped to reduce misuse of loan proceeds and deter bad clients from defaulting. The GLC has been delegated the authority to approve and disburse loans up to a maximum of Nu. 5,000 per client at a time. GLC also has the responsibilities of ensuring that the recoveries are received for loan that it disburses. Requests exceeding this limit are be referred to the BLC at District centres for approval and disbursement.  

The GLC meetings are held as frequently as required depending on the number of applicants and seasonality of such loan requests, but at least four such meetings should take place in a year. The required quorum of the GLC meeting is just simple majority.  

Mobile Banking Operations  

With the introduction of mobile banking facility, the farmers do not have to come to BDFC branch office located at District centres. The mobile banking facility is expected to further assist in increasing outreach and income of the farmers. In the long run BDFC would reap the benefits of economy of scale and be in a better position to offer better services.  

Activities Financed under ALD  

Loans under this programme are available for the following types:  

1.                  Seasonal loans:  

Provide for acquiring seasonal agricultural inputs such as improved seeds, seedling, fertilizers, small hand tools and implements, pesticides, fungicides, etc. and are repayable within one season/year.  

2.                  Term Loans:  

The term loan is made available to finance farm investment activities of a more permanent or longer term nature such as farm machinery, livestock, land development, orchard development, mushroom farming, bee keeping, asparagus plantation, handicrafts & cottage industries etc. The loan term ranges between two to five years.  

3.                  Commercial Agriculture Loans:  

The loans under this scheme are given for financing of large scale orchard development, livestock farming such as dairy, poultry, piggery, fishery; agricultural produce marketing and export etc.  

4.                  Loans for Supply of agricultural Inputs:  

The loans are given to district appointed commission agents for meeting their working capital needs in supplying all sorts of agricultural inputs for further distribution to farmers in their respective districts.  

Loans granted under the ALD programme carry an interest rate from 13% to 15%. All seasonal and working capital loans such as the ones for agricultural inputs have to be repaid within one season/year.  

5.                  Diversification of portfolio  

As per the mandate, the Corporation had been financing mainly agriculture and animal husbandry related activities including cottage industries that encompasses wood craft, cane works, basket making and weaving.  

The other non-farm rural activities can also lead to increase in income and improved livelihood of the farmers. Since such activities can address the real need of the farmers to a great extent, the Corporation had decided to include them as additional activities for the diversification of its portfolio. The following new activities are now being financed to meet the need of the farmers.  

            a)  Transport loan for agriculture products

            b)  Purchase of land as per the government rate

            c)  Trading activities

            d)  Construction and repair of houses

            e)  Small shops & restaurants on the wayside of rural areas

  Loan Schemes  

Under ALD, there are three loan schemes, namely, GGLS (Group Guarantee Lending & Savings Scheme), SIL (Small Individual Loan Scheme) and CAL (Commercial Agricultural Loan Scheme). The loan amount under GGLS ranges between Nu. 5,000 upto a maximum of Nu. 30,000 per client, upto a maximum of Nu. 50,000 per client under SIL and above Nu. 50,001 are being processed under CAL scheme. The interest rates are 13% , 14% and 15% per annum respectively.  

The BDFC have launched GGLS programme replicated from Grameen Bank in 1998 to increase outreach and portfolio. After two and half years of operation, the performance was found to be unsatisfactory. Upon realising the situation, the programme was suspended temporarily for a few months during which the BDFC in collaboration with CARD Bank in the Philippines came up with a revised GGLS manual in the context of Bhutan in October, 2001. The revised scheme is being implemented on a pilot basis at the moment in the three regions (selected Dzongkhags) beginning 2002 to be replicated in their respective regions if it works out satisfactorily).  

The Microfinance loans are delivered within one month time and BDFC expects to further improve its services to the clients.

III.             Strategy to increase Outreach & Portfolio  

The following are some of the strategies to increase outreach and portfolio in the coming years.  

            a)  Further decentralization of decision making process

            b)  Delegate Nu. 30,001 upto Nu. 100,000 to the Regional Manager's

            c)  Minimum number of clients per staff to be achieved on individual basis

            d)  Minimize expenditure and increase efficiency

            e)  Review performance on branch and individual basis

            f)  Need-based diversification of products and services

            g)  Develop meaningful linkages with the line organizations and sectors

  IV.              Projection and Constraints of Rural Credit  

The lending projection was prepared based on the Dzongkhag's credit absorptive capacity, past experience and is also in line with the RGoB's development plan. The projection reflects the amount of loan to be lent to the farmers during 8^th Five Year Plan period beginning 1998.  

The credit fund requirement for the 8^th FYP period was projected at Nu. 494.290 million. The break-downs of the projection are Nu. 49.060 million for the first year, Nu. 63.780 million for the second year, Nu. 86.100 million for the third year, Nu. 120.500 million for the fourth year and Nu. 174.800 million for the fifth year. The lending forecast is based on the lending projection for 1995 estimated at Nu. 39.25 million. The growth rate is assumed on the above rates on cumulative basis. The details of lending projection including the disbursements achieved until end of December 2001 is given overleaf. The table shows that BDFC have achieved about 60% of the disbursement amounting to Nu.  

288.74 million as of year end 2001. By the end of year 2002, BDFC expects to achieve about 80% to 90% of the total disbursement outlay of Nu. 494.290 million.  

Fund Projection of Rural Credit for the 8^th FYP (1997-2002)

(Nu. In Million)